The United States operates under a progressive tax system, meaning different portions of your income will be taxed at different rates. Generally speaking, the more taxable income that you make, the higher your tax rate will be. In the full swing of tax season, our team at Founder’s CPA is here to help you understand federal tax rates and how they can impact you directly.
Different portions of your income can be taxed differently. Various tax brackets represent the tax rate that you’ll pay on the portions of your taxable income. For example, if you are single, the lowest tax rate (10%) will be applied to the first $11,000 that you make in taxable income. From there, the next portion of your income will be taxed at 12%. This pattern continues until you reach the top of your taxable income bracket. As a general rule of thumb, if your taxable income increases, your tax rate also increases.
In terms of the volume of tax brackets, there are seven different federal income tax brackets for 2023 and 2024. These range anywhere from 10 to 37% of an individual's taxable income. Your tax bracket is determined by your income and tax filing status, such as if you’re married filing jointly or single. The tax brackets include single, married filing jointly, married filing separately, and head of household.
If you’re unsure of what your tax bracket is, you can use an online tax bracket calculator. Our team at Founder’s CPA can also assist you!
An effective tax rate refers to the actual percentage of your total income at the end of the year that goes to the IRS. This means the rate that you pay on your last earned dollar (top marginal tax rate) is usually significantly higher than your effective tax rate.
Let’s say half of your income is taxed at 12% and the other is taxed at 10%. Your marginal tax rate would be 12% and your effective tax rate would be 11%, or your average rate. In other words, every 11 cents of each dollar you make will go to the IRS.
A marginal tax rate is the tax rate on the last dollar of your taxable income. In other words, this is the highest tax bracket that you fall under. Let’s say you’re filing as a single with a taxable income of $75,000. Your marginal tax rate for 2023 would be 22%. Even if your taxable income increased by $10,000, your marginal tax rate would stay the same.
In the case that your taxable income reaches $98,000, the last $8,924 would fall under the 24% tax bracket. This means your marginal tax rate is 24%.
State and federal tax rates can be confusing to navigate on your own. This year’s tax deadline is only a few weeks away. If you feel overwhelmed or you’re not sure where to start, we encourage you to seek professional help. At Founder’s CPA, our team has seasoned professionals who can help you navigate the ins and outs of taxes, accounting, and CFO-related services. Get in touch for a free 15-minute consultation!